BSP: Slow growth raises rate cut odds

By Katherine K. Chan

THE PHILIPPINE ECONOMY will likely undershoot the target this year amid spending cuts and weak investor sentiment due to the graft scandal, increasing the possibility of further easing this month,  Bangko Sentral ng Pilipinas (BSP) Governor Eli M. Remolona, Jr. said.

Speaking to reporters at the BSP head office in Manila, Mr. Remolona said gross domestic product (GDP) growth could settle between 4% and 5% by yearend, well-below the government’s 5.5-6.5% goal.

Asked if this raises the odds of a rate cut at its Dec. 11 meeting, Mr. Remolona said: “Yeah, most definitely. But it’s not assured.”   

The BSP in October reduced the benchmark interest rate by 25 basis points (bps) for a fourth time in a row, bringing borrowing costs to an over three-year low of 4.75%. It has so far delivered a total of 175 bps in cuts since it began its easing cycle in August 2024.

The Philippine economic outlook has been clouded by a corruption scandal involving anomalous government projects. This has slowed government spending, hurt investor confidence, and dampened business and consumer sentiment.

Mr. Remolona said GDP growth is expected to slump this year with a slight pickup by mid next year. A full recovery is likely by 2027, he added.

“One reason is part of the decline in 2025 is because the government also cut its spending in order to review flood control projects and other projects. But the main reason is probably the loss of confidence by investors,” Mr. Remolona said.

Earlier this week, Economy Secretary Arsenio M. Balisacan conceded that this year’s growth target is out of reach, after a weaker-than-expected third-quarter growth.

In the third quarter, the Philippine economy grew by 4%, the slowest in over four years. This brought the nine-month GDP growth average to 5%.

RRR CUT
Meanwhile, Mr. Remolona said lowering banks’ reserve requirement ratio (RRR) is unlikely to spur economic growth.

“It’s already very low, so a further cut won’t do that much,” he said. “So, when you go from 5% to, say, 2%, it’s not a lot when it comes to the reserve requirement. But still, it might help.”

The BSP governor noted that although they are considering a further reduction in RRR, the timing is uncertain amid excessive liquidity in the financial system.

“I didn’t commit to the timing. At present, we still have too much liquidity in the system. A cut in the reserve requirement will add to that liquidity,” Mr. Remolona said.

In February, the BSP cut universal and commercial banks and nonbank financial institutions with quasi-banking functions’ RRR by 200 bps to 5%. Digital banks’ RRR was reduced by 150 bps to 2.5%, while thrift banks’ RRR was lowered by 100 bps to 0%. The RRR cuts took effect in the week of March 28.

On the other hand, Mr. Remolona said the peso recently gained strength amid the anticipated easing by the US Federal Reserve.

“We’ve had some recovery in the peso, partly because the Fed is expected to cut rates on December 10^th, and for other reasons,” he said.

The Fed has so far lowered its key policy rate by 150 bps since September 2024, bringing it to the 3.75-4% range.

It is set to have its last meeting this year on Dec. 10, a day before the BSP’s last policy meeting this year.

SLOWER GROWTH
Meanwhile, Nomura Global Markets Research sees the economy expanding by 5.3% in 2026, a downgrade from its earlier projection of 5.6%.

“We cut our 2026 GDP growth forecast to 5.3% from 5.6%, which is a more modest pickup from 4.7% in 2025, despite low base effects,” Nomura said in its Asia Macro Outlook 2026 released on Wednesday. “We believe the ‘bad scenario’ continues to play out regarding the impact on growth of the ongoing government corruption scandal via a sharp drop in public sector spending.”

Nomura said dismal growth may prompt the central bank to deliver deeper rate cuts until next year to a terminal rate of 4%.

In its report, Nomura said the Philippines may secure a credit rating upgrade from S&P Global Ratings if it ensures timely resolution of the ongoing flood control corruption scandal.

If realized, the country’s credit rating will just be a notch lower than the National Government’s “A” level grade target.

“On credit ratings, we expect… a one-notch upgrade by S&P on the Philippines, assuming a resolution of the graft scandal is not delayed,” it said.

S&P Global Ratings last week kept its long-term “BBB+” and short-term “A-2” credit ratings as well as its “positive” outlook on the Philippines.

The credit rater noted that the economic slowdown due to the flood control fiasco will likely be temporary.

“This implies S&P is likely to wait another year and, in our view, uncertainty remains high: if a resolution to the corruption scandal is somehow reached and signs of an economic recovery emerge, a one-notch upgrade to “A-” is possible; otherwise, the risk we see is the outlook could be put back to ‘stable’ or even reduced to ‘negative,’” Nomura said.

However, Mr. Remolona noted that S&P’s recent affirmation of the country’s credit ratings could help regain market confidence and boost the economy.

“The stock market has recovered, so that kind of shows that confidence is coming back. S&P reaffirmed our positive outlook, which means we’re still on track for an upgrade in our ratings,” he said. “So, the signs suggest that the confidence is returning.”